THE INVESTOR CENTRE
THE INVESTOR
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37
S
econd-quarter results have generally
supported our more optimistic outlook.
Figures announced so far have, on average,
beaten consensus analyst forecasts by a
healthy 5%. Highlights include a particularly
strong quarter from the banking sector,
with, most notably, results from BNP, Intesa
and Commerzbank signi cantly exceeding
expectations. Elsewhere, a broad spectrum
of di erent companies, includingAirbus,
Legrand,Axel Springer,AssaAbloy and
Mediaset generated impressive gures.
Furthermore, updates from British house
builders yet again exceeded already recently
upgraded forecasts.
We continue to believe that most analysts
have failed to appreciate the intensity of the
recovery which, as earnings growth becomes
increasingly‘visible’ throughout the year,
should lead to signi cantly higher share prices.
At the same time, the eurozone moves
ever closer to normalisation.Many investors
have struggled to accept how deeply
companies and governments have
restructured at the periphery of Europe. In
fact, a signi cant proportion of peripheral
Europe’s productivity gap with Germany has
now been eliminated over the past few years.
Yet the market remains compellingly
valued, with shares pricing in an unusually
bearish decline in returns on capital into
perpetuity. Even more strikingly, the more
domestically orientated companies are
trading at, in many cases, a 50% discount to
their US counterparts.
S. W. MITCHELL CAPITAL
Continental European
Joint manager: Greater European
and Greater European Progressive
Signs of growth remain positive
across the eurozone
Earnings growthwill
helppropel share
prices higher
G
lobal equity markets have declined in
recent months as investors’ outlook for
the global economy has increasingly come to
mirror the viewwe have held for some time.
We believe that worldwide economic growth
will be muted for some time and that
individual countries will nd themselves
competing in zero-sum fashion for their piece
of a slower-growing economic pie.
Developing economies continue to report
disappointing economic growth.US and
European exporters are citing the dual headwind
of weak local demand and depreciating
currencies in the emerging markets,which is
weighing on developed world earnings growth.
We are more constructive on both the US and
European economies,which are bene ting
from accelerating demand at home,with the
notable exception of energy and commodity-
related industrial companies for whom the
collapse in oil and other commodity prices
continues to weigh on the near-term outlook.
We expect the US to experience steady GDP
growth for the remainder of the year, driven
by improving consumer balance sheets,
accelerated growth in household formations
and strong employment trends.
Despite the recent equity market pullback,
valuations remain full for many of the
businesses we follow.We focus on owning only
the highest-quality companies that are capable
of driving strong earnings growth over the next
three to ve years irrespective of the macro
environment,through a combination of market
penetration, share gains and pricing power.
SELECT EQUITY
Joint manager: Worldwide Managed
and Worldwide Opportunities
The focus is on high-quality firms
with strong mid-/long-term prospects
Worldwide economic
growth is set to slow
in coming years
Stuart Mitchell
George Loening and Chad Clark
V
olatility returned with a vengeance
to global equity markets over the
past couple of months as concerns about
China’s future growth, its collapsing equity
markets, the devaluation of the yuan and
prospects for higher interest rates in the US
weighed heavily on markets.
After six and a half years of strong and
relatively stable equity markets, valuations
had climbed to levels that we believe were
simply unsustainable in light of near-term
macroeconomic strains and what has been
rather anaemic economic growth.
The dichotomy between in ated equity
prices and underlying fundamentals nally
came home to roost for investors.That
said, the correction was fast and furious
and, as we write, most developed markets
have regained much of the ground they
lost inAugust.
We suspect that whatever was ailing the
market a few weeks back is more than
likely still with us and if traders nd it
ever-so-frightening to contemplate even
a 0.25% hike in interest rates in the US,
what is that telling us about the fragility of
global equity markets? If the recent increase
in volatility remains with us for a time,
bargain hunters such as ourselves should
be well-positioned to take meaningful
advantage.
TWEEDY, BROWNE
Satellite manager: Global Equity
Volatility in the market creates
opportunities for bargain buying
More than six years
of growth le equity
valuations overin ated
William Browne, Tom Shrager,
John Spears, Robert Wyckoff
